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Reliance Industries’ (RIL) oil-to-chemicals (O2C) business is likely to remain under pressure for the rest of the current financial year, according to analysts and company executives. “Management expects some softness for the next two quarters in the retail and O2C businesses,” analysts at BOB Capital Markets noted in a post-earnings report on RIL on Tuesday.
For the July-September quarter (Q2) of 2024-25 (FY25), RIL’s O2C business recorded a 5.1 per cent increase in revenue year-on-year at Rs 1.55 trillion. However, the segment’s earnings before interest, taxes, depreciation and amortization (Ebitda) fell 23 per cent to Rs 12,413 crore, with a 300 basis point reduction in Ebitda margins. Calling the second quarter a difficult quarter, Morgan Stanley analysts said they expect cyclical challenges in retail and refining to ease in 2025, which will be key to reversing the cycle of downward revision of estimates.
The BOB Capital Markets report also said that RIL’s profits are likely to have bottomed out, although the weakness could persist for a few quarters. HSBC analysts agree, observing that O2C is expected to remain subdued due to weak macroeconomic conditions and new capacity coming online. In RIL’s second quarter consolidated Ebitda of Rs 43,934 crore, O2C contributed Rs 12,413 crore. Nomura analysts estimated that refining margins of $8 per barrel declined by $0.5 per barrel sequentially in the second quarter due to weak spreads on transportation fuels. JP Morgan analysts observed that margins at RIL’s petrochemical (petchem) business have not been encouraging so far in October. “A cold winter could support diesel demand seasonally. However, our margin tracker for RIL’s petrochemical portfolio remained weak throughout the first half of October,” they said.
Others, like Jefferies, have further reduced their Ebitda estimates for the O2C business, citing falling diesel demand in China and unprecedentedly weak chemical spreads due to weak demand in China and India.
“Our current earnings per share forecasts are based on rather pessimistic expectations for retail and O2C, which leaves room for positive surprises,” they added.
On the other hand, Nomura analysts remain optimistic, seeing the start of new energy operations as a potential catalyst for RIL in the coming months. Mukesh Ambani, chairman and CEO, announced Monday that the first of the company’s new energy gigafactories is on track to begin producing solar photovoltaic modules by the end of this year.
First publication: October 15, 2024 | 10:57 p.m. STI